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Electricity Generator Levy: What businesses need to know

What is the rationale behind the Electricity Generator Levy?

The structure of worldwide energy markets means that wholesale gas prices affect the price of electricity.  The unprecedented increase in gas prices caused, in no small part, by the Russian invasion of Ukraine has therefore resulted in many electricity generators seeing extraordinary returns.

In an effort to ensure that electricity generators contribute towards public finances, and with the stated aim of supporting households and businesses with cost of living challenges, the UK government announced, in its Autumn Statement published on 17 November 2022, a new, temporary 45% levy on these extraordinary profits, defined as electricity sold above £75MWh.

This Electricity Generator Levy will replace the proposed Cost Plus Revenue Limit announced in October.

Pylons now subject to the Electric Generator Levy

How will the Electricity Generator Levy work?

The new tax will apply to corporate groups that undertake electricity generation in the UK from nuclear, renewable and biomass sources (including energy from waste) that are connected at transmission or distribution level.  The levy will not apply to coal, oil or gas fuelled power generation, to pumped storage hydroelectricity, or to battery storage plant.

A de minimis threshold will limit the levy to groups generating more than 100 GWh per annum of electricity from in-scope generation assets in a qualifying period [1].

The levy will apply from 1 January 2023 to 31 March 2028 [2]. It will be payable in addition to corporation tax and will be administered in the same way as corporation tax.  It will be legislated for in in the next Finance Bill.

The government has published a technical note which further explains the operation of the Electricity Generator Levy.  In particular, it sets out that in-scope corporate groups will be subject to the charge on ‘exceptional generation receipts’, which will be calculated as:

Generation Receipts – Electricity Generation x Benchmark Price – Allowance [3].

This means that receipts from in-scope generation at an average output price above £75 per MWh will fall within scope, but the Electricity Generator Levy will only apply to ‘exceptional generation receipts’ in excess of £10m.

The levy will be charged by reference to revenue received as opposed to profits.  However the technical note states that the measure of revenue should take account of, or be adjusted for, certain items. Precise details of what can be taken into account is likely to be key.  Affected corporates should take specialist advice.

The Electricity Generator Levy will not capture electricity generated under a Contract for Difference, or revenue earned from the sale of Renewables Obligation Certificates or from capacity market payments.

The Electricity Generator Levy: How we can help

Draft legislation is expected in mid-December 2022.  Walker Morris will monitor and report on key developments.

Our dedicated Infrastructure & Energy lawyers, working alongside our Tax specialists, can provide tailored advice as to the legal and commercial implications of the Electricity Generator Levy.

Please contact Ben Sheppard for further information.